Tuesday, August 26, 2008

Previously secret Treasury documents reveal that in preparing the May Budget the Treasurer Wayne Swan squibbed on a promise to do “everything possible to put downward pressure on inflation”.

The documents, released to the Seven Network under the Freedom of Information Act advised Mr Swan’s office that one way to place downward pressure on inflation would be to defer the $31 billion of tax cuts promised during the November election.

The Treasurer and Prime Minister went ahead with the tax cuts nevertheless, making them a central part of the budget night speech.

The advice was in a draft briefing paper from the Treasury’s Individuals Tax Unit sent to the Treasurer’s office on February 14...It said that deferring the tax cuts due to start in July would “reduce household incomes in the near term”.

It said that to the extent to which it also reduced aggregate demand and the subsequent demand for labour and capital, it would “place downward pressure on inflation”.

It is unclear whether the Treasury went further and advised Mr Swan to postpone or modify the promised tax cuts. Most of the paragraphs in the document released to the Seven Network are blacked out.

One sentence that remains notes that there are "significant sensitivities with any proposal to defer or delay the tax cuts".

Mr Swan had previously rebutted suggestions that the tax cuts would add to inflation and by implication refused to accept that deferring them would help fight inflation.

During the first six months of this year inflation has soared well above the Reserve Bank’s 2% – 3% target, hitting an annual rate of 4.5%. The Reserve Bank is predicting that it’ll hit 5% next year.

The Treasurer said last night that the July tax cuts had proved popular and well-timed.

“There was a huge queue of people advising the government not to deliver the tax cuts. I was never in that queue, and there’s nobody in it now,” he said.